The world's environment faces significant threats from anthropogenic or “human-caused” releases of greenhouse gases to the atmosphere. Greenhouse gases, such as water vapor, carbon dioxide, tropospheric ozone, nitrous oxide, and methane, are generally transparent to solar radiation but opaque to longwave radiation, thus preventing longwave radiation energy from leaving the atmosphere. The net effect of greenhouse gases in the atmosphere is a trapping of absorbed radiation and a tendency to warm the planet's surface.
In general, the rapid increases in the concentration of greenhouse gases in the earth's atmosphere caused by human activity increases the risk of fundamental and costly changes in the earth's climate system. Such risks can include more severe drought/precipitation cycles; longer and more extreme heat waves; spread of tropical diseases; damage to vegetation and agricultural systems; and threats to coastlines and property due to higher sea levels and storm surges.
Significant greenhouse gas emissions derive from the electricity production through burning fossil fuels (e.g. coal burning power plants) to supply consumers including businesses that produce goods and provide services. Fossil fuels are also consumed directly by businesses in manufacturing goods or providing services, such as by natural gas powered HVAC systems or by gasoline powered vehicles. Ultimately, the amount of energy produced is determined by the level of demand by consumers. If consumption of energy is decreased, energy generation will decrease, as will the amount of greenhouse gases that are produced by electric power generation or direct fossil fuel consumption. An effective system is needed to encourage consumers of energy to be more efficient.
In the 1980's, the United States implemented an emissions trading system to phase out lead from motor fuel. This effort was followed by a highly successful U.S. Environmental Protection Agency (EPA) sulfur dioxide (SO2) emissions trading program. To reduce acid rain, an overall cap on SO2 emissions was imposed on electric power plants. Utilities that found it expensive to cut sulfur emissions could buy allowances from utilities that make extraordinary cuts at low cost. Emissions were reduced faster than required and costs were far below most forecasts. There has also been steady growth in the trading of allowances, from 700,000 tons in 1995 to approximately 16.9 million tons in 2007 from 4,700 transactions. The SO2 emissions market reached a value of approximately $5.1 billion in 2007.
The environmental and economic success of the U.S. sulfur dioxide allowance trading program to reduce acid rain, as well as other similar markets, provides evidence of the benefits of a cap-and-trade system to encourage desirable behavior. This application describes such a system applied with the goal of reducing energy use relative to production, where the tradable instrument is a unit of energy and compliance requires that an entity achieve a ratio based on the measure of energy consumed to the measure of goods produced, services provided, revenues generated or other activities undertaken. It is a measure of energy efficiency.
Such a system introduces scarcity by making available a limited amount of rights to use energy (i.e. energy credits), establishing requirements that entities achieve a level of energy efficiency (expressed as the ratio), and allowing entities to trade those credits in a market that determines a financial value for the credits. Those who can become more energy efficient at low cost will be incentivised to do so (e.g., as an alternative to purchasing credits), and if they are allowed to sell surplus credits they will be further incentivised to become even more efficient. Companies facing high costs or other barriers to cutting energy use can comply by purchasing energy credits from those who make extra cuts. This approach buffers the potentially disastrous effects of absolute reduction requirements. The market in a property-like instrument—energy credits—helps assure efficient use of energy, thereby reducing greenhouse gas emissions and protecting the environment. It also yields a price that signals the value society places on protecting the environment. That price represents the financial reward paid to those who reduce energy use and also indicates the value of creating innovative energy efficiency techniques.
It would be desirable for such a system to provide for the issuance of energy efficiency credits to entities or projects that do not use significant amounts of energy and accordingly are not required to become more efficient, but which conduct an activity that is beneficial such as generating energy from renewable sources (e.g. wind, hydro, biomass, geothermal, etc.). This feature would provide an additional source of credits to be used by entities that are subject to energy efficiency requirements, while also providing a funding source for environmentally desirable activities.
Many major industrial nations have sought the design of a greenhouse gas emissions trading program that can provide corporations and others an organized, market-based mechanism for cost-effectively reducing global warming gases. Current systems do not effectively address climate change by requiring increased energy efficiency, while offering participating entities significant commercial opportunities.
Examples of barriers to current systems that involve energy efficiency credit trading include regulatory uncertainty; lack of a clear, widely-accepted definition of the commodity; lack of standards for monitoring, verification, and trade documentation; difficulty in efficiently adapting to changes in business (i.e., scalability); difficulty in properly addressing diverse characteristics of multiple business sectors and other energy users; and lack of organized markets and clear market prices. Other barriers and challenges also exist. These barriers significantly impede progress in adoption of such a program and the corresponding greenhouse gas reductions by raising the costs to participating entities and administrators of the program.
Thus, there is a need for a system that reduces energy use relative to production, so that it neither hampers businesses from ramping up production of goods, services or revenues, nor creates a windfall for business that decrease production. The system must be efficient both for the subject energy users and the administrator of the system. An integrated computerized system that limits rights to use energy relative to production, and that allows rights to be transferred on an organized trading system will promote energy efficiency and the reduction of greenhouse gas emissions.